Pier 1 2009 Annual Report Download - page 57

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1—DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
SFAS 123R requires that forfeitures be estimated at the time of grant. The Company estimates
forfeitures based on its historical forfeiture experience. In accordance with SFAS 123R, the Company
adjusts forfeiture estimates based on actual forfeiture experience for all awards with service conditions.
The effect of forfeiture adjustments for the year was insignificant.
Liquidity—From fiscal 2006 through fiscal 2009, the Company has incurred net losses and had
negative cash flows from operating activities. The Company’s turnaround plan includes making
conservative inventory purchases, managing those inventories, continuing to make the Company’s
merchandise offering more compelling, and improving the in-store experience. In addition, the
Company will continue to focus on its ongoing mission to maximize its revenues, while seeking out
ways to reduce its cost base, considering refinancing alternatives of its convertible senior notes, and
preserving its liquidity. The end of the difficult economic situation faced by the United States is not
known at this time and consumer confidence and spending could remain depressed and possibly
deteriorate even further. The Company may incur negative operating cash flows in future periods, and
a long-term decline in consumer spending could have a material adverse effect on the Company’s
financial condition and ability to generate cash flows from operations. There can be no assurance that
the Company will achieve or sustain positive cash flows or profitability over the long-term. During fiscal
2010, the Company may become dependent on availability of adequate capital including utilization
under its secured credit facility to fund operations and carry out its turnaround strategy. The Company
believes that its existing cash balances and borrowings under its secured credit facility will provide
sufficient liquidity to fund operational obligations and capital expenditure requirements through fiscal
year 2010. However, if fiscal 2010 cash flow needs are in excess of availability under the secured credit
facility and the Company is unable to obtain additional financing sources, the impact thereof will have
a material adverse effect on the Company’s business, financial condition and results of operations.
Adoption of new accounting standards—In May 2008, the Financial Accounting Standards Board
(‘‘FASB’’) issued FASB Staff Position (‘‘FSP’’) APB 14-1, ‘‘Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)’’, which clarifies
that convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, ‘‘Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants.’’ Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and equity components in a manner that
will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP will be applied retrospectively to all periods presented. FSP APB 14-1 is
effective for the Company at the beginning of fiscal year 2010. The Company is currently evaluating the
impact of the adoption on its financial statements.
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